A lot has changed since Peter van Rossum last spoke with CFO Europe in November 2007. Then, the finance chief was busy ploughing through the integration of French commercial-property group Unibail and Dutch peer Rodamco Europe, confident that the enlarged group’s focus on cash flow would see it through the fallout from the subprime crisis.
The outlook for commercial-property investment today is much darker. According the Investment Property Databank, real estate investment provided mixed results across Europe during 2008—while returns in the Netherlands and Danish markets slowed but remained positive, those in the UK hit a low not seen since the 1970s. Overall investment in European real estate fell by more than 50% compared with 2007, according to property consultant CB Richard Ellis.
But Unibail-Rodamco, which invests in, operates and develops a €24.6 billion portfolio of shopping centres, offices and exhibition centres in continental Europe, has delivered. Last year its rental income was €1.2 billion, compared with €1.1 billion in 2007. Earnings per share also rose. For van Rossum, a board member of Rodamco before the €11 billion merger in 2007, the downturn has offered as many opportunities as challenges.
When we spoke in 2007, you were optimistic about the outlook for Unibail-Rodamco. Where does the company stand today?
It’s been an interesting time for real estate in general and for us in particular. There is concern about retail, and different countries are affected in different ways—Spain is a good example of a country more affected than others. But retailers are looking for safe havens, places where people continue to come, where the footfall is strong. And those are the centres that we invest in, so we still see resilience in our business model and in the asset class.
Last year we sold or swapped some of the assets that don’t fit our strategy, which is to focus on large shopping centres in continental Europe. We also bought two of Europe’s top 25 shopping malls [in Austria and Spain]. In normal years that would never happen, but in 2008 a number of top assets were trading. Our balance sheet is very strong. The loan-to-value ratio is 30%, and it was 28% at mid-year, so there’s only a slight increase despite the fact that the value of our real estate took a hit in 2008.
What’s happening to the value?
We took on average a hit of just over 9% on our assets in 2008. But the important thing that we always remind the investment community is that we’re not traders of our asset base. We’re long-term investors and we focus on cash-flow growth. During the past couple of years we never took great pride that the value of real estate went through the roof. By the same token, we’re not overly worried by the fact that we see a correction at the moment, because it’s not hitting us in our cash flow. On the contrary, it’s opening up opportunities where, thanks to a strong balance sheet, we can make some decisive actions on assets that we like. In the past that was more difficult because there was a huge amount of competition from a lot of financial players active in the market. But now hedge funds and other financial buyers have all but disappeared and it’s the reputable, dedicated real estate players who are active at the moment.
In what ways have you refocused the portfolio?
We’re good at managing large shopping centres, mainly in the capital cities in continental Europe. Some assets don’t contribute that much to the growth we’re targeting—small high street shops, provincial shopping centres. We sold a portfolio of somewhere close to 250 shops in the Netherlands for about €744m and we sold a high street portfolio in Belgium for close to €100m.
When we spoke before, you said you’d had a firm focus on cash flow. Has the finance function’s attitude to this changed since?
Our vigilance on things like debt collection has increased. Once, we took it for granted that payments would come in. Now, we’re measuring this on a much closer basis from the corporate centre. On the treasury side, access to funding has become more of a challenge. Though it’s been much harder work than it once might have been, we signed up for €2 billion in new loans in 2008 at quite affordable rates with good maturities, and we rolled over something like €430m in bank loans.
How have your priorities as a CFO changed during the crisis?
You need to be on top of your business. You can say that’s always been the case, but in a time of crisis it’s even more important that you pay attention to the details, that you know exactly what’s going on in your organisation. Decision support is also crucial. It’s very important for me that my finance team—which includes the tax and treasury guys, the control team, the consolidation team—is very close to the positions that we are taking. When we get an investment or a divestment proposal on our desks, we need to have a total overview of the fiscal and reporting consequences to make sure there are no loose ends.
Are there lessons you’ve learned as a finance chief during this time?
Time is of the essence. The world is changing very quickly around us. Within the past couple of years, all the signs were positive. You could afford to wait and an even better situation would probably come in a month. That is no longer the case. You need to act quickly and decisively. That means you have to manage your teams tighter and work them harder.
What’s your outlook?
Our cash flow model is quite predictable. We have long-term contracts and only a very small proportion of our rental income is tied to the turnover of our tenants. So we’re quite confident in giving an outlook for 2009. We predict that the recurring earnings per share, which is a cash flow proxy, will grow by at least 7%. Over 2008 we did 8.4%, which was well received in the market. Seven percent is going to be hard work, but if we weren’t confident we wouldn’t put that number out.